Gottschalks files for Chapter 11 bankruptcy

FRESNO -- Fresno-based Gottschalks filed for bankruptcy protection Wednesday, vowing to remain open as it searches for a buyer and seeks other ways to survive.

Creditors have agreed to give the department-store chain until March 24 to sell the company or it will have to liquidate, according to the Chapter 11 bankruptcy documents filed Wednesday in Delaware, where Gottschalks is incorporated.

"This was a very difficult, but necessary decision," Gottschalks Chairman James Famalette said in a statement, pointing to the credit crunch and disastrous economic climate facing retailers across the nation. "The persistent challenges in the economy and recent unexpected reductions to our borrowing capacity have left us with no other recourse." The company's board of directors authorized the bankruptcy action Tuesday. The filing protects the company from creditor lawsuits while allowing it to remain in business as it tries to reorganize and pay off debts.

Gottschalks reported assets of $288.4 million and debts of more than $197 million as of Jan. 3.

Gottschalks was founded in 1904 in Fresno. In addition to its 58 department stores and three specialty clothing stores throughout the western United States, the company also has its corporate headquarters in north Fresno and a large distribution center in Madera.

Gottschalks employs about 5,200 people.

Fresno Mayor Ashley Swearengin said she hopes the department-store chain pulls through and maintains a presence in Fresno.

"Gottschalks is such an important part of the fabric of this community," she said.

Swearengin said there's not much the city can do to help, however.

"It's unlikely there are any levers we can pull," she said.

The news came as no surprise -- for weeks retail industry analysts have predicted that Gottschalks would seek bankruptcy protection. In its third-quarter earnings report, Gottschalks officials themselves warned that the company could run out of money before the end of its fiscal year on Jan. 31.

The company has negotiated a $125 million "debtor-in-possession" financing arrangement with a group of creditors headed by GE Capital, Gottschalks' chief creditor. The money will allow Gottschalks to continue operations, including employee payroll and benefits, payments to suppliers and other expenses, as it tries to find a buyer, officials said.

In a telephone interview Wednesday, Famalette said the Chapter 11 filing provides Gottschalks with flexibility to continue to operate as it seeks to sell the company, find additional investors or pursue other options.

"For our customers, it should be business as usual," Famalette said. "Our employees will continue to work and be paid in the normal course of business and we will be focusing on making sure our stores are operating normally." It's not clear how Gottschalks' vendors will fare.

Famalette said any debts owed prior to the filing will be dealt with in bankruptcy court.

He said because Gottschalks will be armed with new bankruptcy credit terms from GE Capital, "we will hopefully be able to get as close as possible to running our normal business, paying our vendors for all their merchandise." Famalette said many of Gottschalks vendors have indicated willingness to continue shipping goods.

Ron Parham, vice president of investor relations for one of them -- Portland-based Columbia Sportswear -- said he knew Gottschalks' bankruptcy filing was a possibility.

Gottschalks owes Columbia $277,996, according to the bankruptcy petition.

"We have been watching the situation closely," Parham said. "But we hope they can navigate through this process and can continue to be one of our customers.." Another big creditor is The Fresno Bee. Gottschalks owes the newspaper, which is the only Valley firm among the retail chain's top 20 unsecured creditors, more than $354,000. Bee President and Publisher Will Fleet said Gottschalks was The Bee's largest advertising customer in 2008.

"Obviously things are tough all around, and this is another sign of the difficult economy we're all experiencing," Fleet said. "It's an unfortunate development for all of Fresno, but the good news is the stores remain open."

"It's never good news to have any of your accounts receivable go into bankruptcy," Fleet added. "But Gottschalks and The Bee have been good partners for many years, and I'm looking forward to us working together and working through this process."

If Gottschalks survives, it may look very different.

Gottschalks executives said they have not yet decided whether to close stores or lay off employees.

While Gottschalks lost money throughout 2008, Famalette said there are some profitable stores in the chain. He declined to spotlight any particular markets, except to say that "generally, our Fresno stores are very productive." Retail industry consultant Howard Davidowitz said he doubts Gottschalks can successfully reorganize or find a buyer for the entire company.

He questioned the terms of the loan from GE Capital. "Is it a short-term loan that bridges a period of time so creditors can maximize their return (through liquidation), or is it a loan where Gottschalks can really attempt to reorganize?" asked Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm in New York.

Most recent debtor-in-possession loans, Davidowitz said, "were so expensive, so loaded with fees and so short term, there's no way the debtor could have a viable business." He cited Mervyns and Circuit City as cases where the loans virtually guarantee liquidation.

Davidowitz said some retail companies may be interested in cherry-picking Gottschalks better-performing stores, but the Gottschalks name may disappear. "I think that would need divine intervention," he said.

Scott Avila, a managing partner with Corporate Revitalization Partners in Los Angeles, said bankruptcy is a difficult to navigate.

"My gut tells me they're going to have to be restructured, but what that looks like nobody knows yet," said Avila, whose company helps firms reorganize both before and during bankruptcy. He said the country just has too many retail stores.

Avila said much will depend on Gottschalks' strategy. He said landlords, creditors and suppliers want to know if a company is viable: "They want to know whether the business plan makes sense."

Famalette said he's optimistic.

He said in some markets, Gottschalks stores are picking up business after rival Mervyn's liquidation late last year.

"There is reason to believe Gottschalks can be a healthy operation," Famalette said. "As the economy improves, there could be a much stronger company that emerges from this."

The bankruptcy filing is the latest financial blow to a company long considered a cornerstone of Fresno's business community.

The company went public with its stock in 1986, and in 1991 its stock climbed to a peak of more than $25 a share.

But recently, the stock sagged, sinking to an all-time low closing price of 15 cents per share Wednesday.

In October, the company's market value fell below $25 million, prompting the New York Stock Exchange to suspend Gottschalks from the Big Board. The action sent the stock onto the Pink Sheets, an electronic stock bulletin board.